Times are still tough for currency managers, who have found it difficult to make money out of volatile foreign exchange markets, and face increased scepticism from some investors and consultants. But the firms are fighting back.

Currency managers’ misfortunes began with the collapse of the “carry trade”, a common strategy before the financial crisis, involving borrowing in low-interest-rate currencies to lend in those paying high interest rates.

But managers, with the support of some investment consultants, are still backing the concepts of “currency for return” mandates, which try to make money out of the forex markets, and passive hedging.

Some active firms, such as Principal Global Investors or London boutique Adrian Lee & Partners, have posted good performance right throughout the troubled markets of recent years.

Malcolm Leigh, a senior manager-research consultant at Mercer, said: “Having seen several active managers blown apart by the hurricane when the carry trade broke down and did not really recover, we are more conscious today of finding firms that do not rely on it wholly.

Active currency management went through a bad period, but the same is true of other active strategies. There are also very early signs of a recovery.”

Negative publicity is not helping. In the UK, at least two public pension plans have found themselves with cash tied up in bankruptcy proceedings, after money related to currency mandates was put with Lehman Brothers and MF Global.

In the US, a London-based fund manager, Record Currency Management and two of its clients, the Kentucky and Maryland retirement plans, suffered critical remarks in the local press when a dispute broke out between the Kentucky state public pension fund and one of its ex-trustees.

Record, founded in 1983 by former Bank of England economist Neil Record, closed its flagship actively managed fund in April following client withdrawals, and staff agreed a 10% pay cut in June.

Christopher Tobe, the former trustee of the $12bn Kentucky Retirement Systems and now an independent consultant, argues that the foreign exchange losses suffered by his former fund demonstrate that pension funds do not need to hedge foreign exchange.

He said: “Public plans buy international stocks because they move differently than domestic stocks and part of this is currency. Our [Kentucky’s] international stock benchmark is not hedged so we do not need to or want to hedge.”

The approach used by the Kentucky and Maryland plans is not purely a passive hedge, but a “dynamic” one that is intended as an equivalent of an insurance policy.

By forgoing a portion of the profits from positive movements in overseas currencies, the fund “insures” against dramatic negative moves.

According to a statement last month from Kentucky Retirement Systems executive director William Thielen, Record’s strategy “performed in a manner that was consistent” with this intention.

Between August 2009, when Record began work, and the end of May this year, the pension fund made $54m less on its foreign holdings than it would have done without Record’s overlay.

But Thielen said Record had reduced the volatility of its returns during the period – a key aim – and that the $54m was less than Record had originally said its “insurance” might cost.

In November last year, following the appointment of new chief investment officer TJ Carlsen, the fund terminated Record’s mandate, saying the cost had proved too high given a smaller-than-expected reduction in volatility.

James Wood-Collins, Record’s chief executive, declined to comment on the Kentucky case specifically, but said its dynamic hedging strategy had performed as expected. He says there is further appetite for Record’s hedging strategies from pension plans in the UK, Switzerland and the US.

He said: “When Neil founded the firm in 1983 it began as a hedging business. In the past few years, the most relevant distinction has become between firms that have the infrastructure and background in currency hedging to fall back on, and those managers that only ever had return-seeking business and hedge-fund strategies.”

Wood-Collins also said he viewed “three new tenders from UK local authorities for dynamic hedging mandates in the past 18 months” as a positive development.

Malcolm Leigh at Mercer said that appetite from UK clients had been subdued in 2012: “We saw quite a large move into passive risk-reducing strategies in 2011, but very little in 2012 – or indeed in active mandates.”

Leigh said one reason was probably that sterling is currently in “the middle of its historical range” at $1.57.

He said: “When considering a decision to hedge, or to remove a hedge, you would naturally want to do that at a period when sterling was either at the top or bottom of its range.”

That was a decision we took about 18 months ago; though we’d not been actively recommending them for several years before.

“We do have some clients who use passive currency-hedging mandates, but not many. We tend to think sterling is a currency that does poorly in times of stress, so having unhedged foreign currency holdings during these periods is actually a diversifier that offers protection.

The classic example was in 2008. A portfolio of unhedged global equities would have lost about 20% – but if you hedged it, it would have lost 40%.”